From the weekly lows of Friday, July 24, the ICE Dec’20 contract stepped up onto a sideways plateau until popping up over 63 cents on Thursday and settling the week at 62.66 cents on Friday (see graph above courtesy of Barchart.com). Chinese and world cotton prices were mixed this week.
Fundamental influences this week included a modest improvement in crop condition ratings, ongoing assessments of U.S. production losses from Hurricane Hanna (perhaps 250,000 bales in the Rio Grande Valley), with anticipation of more tropical impacts this weekend on the eastern seaboard.
Outside market influences included historically bad indicator of U.S. economic growth, perhaps unprecedented political developments, a continued weakening of the U.S. dollar, and mostly lower financial markets.
Commercial cotton demand remains reportedly slow (see here, pp. 2-3). Thursday saw surprisingly strong old crop export sales, and weak new crop export sales. Actual export shipments of old crop bales were stronger than in previous weeks. Certified stocks continued to decline from the peak in early July.
The week saw low to normal volume trading of ICE cotton futures, with a static pattern of open interest. Speculative activity in the last week involved fewer hedge fund longs and slightly more hedge fund shorts, as of the Tuesday snapshot of Commitment of Traders data.
Ultimately, the market can’t avoid the bearish implications of USDA’s old crop balance sheet and the negative spillover effects for the 2020/21 situation. The June and July WASDE numbers reinforced the previous two month’s projections of lower consumption and higher ending stocks. Recent indicators of reduced demand include a 79% decline in U.S. clothing store retail sales in April, and a correspondingly large decline in estimated consumer spending on apparel. Even May’s recovery of U.S. clothing retail sales is still below normal levels, and the June retail apparel sales show the same thing, i.e., higher month over month, but lower year over year.
The longer term damage to cotton consumption by the COVOD-19 pandemic will surely take many months to resolve. If there was a near term medical quick fix to the spread and effects of COVID-19, I would expect only a partial relief in commodity and equity markets. The “fear and panic” portion of the decline in cotton prices might keep ICE futures over 60 cents, perhaps reaching the mid-60s or higher. But the repairs to cotton’s global supply chain and consumers’ willingness to buy apparel may take longer to normalize. Hence a return to profitable market price levels may not happen during 2020.
From a marketing standpoint, both old crop and new crop cotton prices remain at the low level of the federal program price support. In government-speak, the adjusted world price (AWP) remains below the 52-cent loan rate. This makes for positive loan deficiency payment (LDP) rates for those who sell their cotton in the cash market (being careful to maintain beneficial interest). So the worst having happened (knock on wood), there isn’t much sense in paying for more downside price protection.